RRD - Module Overview

Risk, Return, and Diversification

Introduction

Best Investment Advice ever:
"Buy what you know." "Buy what you know." According to the Motley Fool website, these four words are the best investment advice ever. What the Fool is trying to say is: don't invest in things you don't understand. In this module, we will begin to look at all the different ways we can invest our money. The investments we choose will depend on how we feel about risk, our financial goals, and our stage of life. Once you have created a budget and accumulated an emergency fund, you will have a variety of ways to build wealth. Savings accounts, certificates of deposit, and money market accounts can keep money safe but have a low return. Stocks, mutual funds, bonds, and treasury securities, have higher returns and somewhat higher risk. You need to choose wisely.

Essential Questions

What are the similarities and differences between saving and investing?
What factors affect investment choices?
What risks must be considered in investing and saving?

Key Terms

criteria text annotation indicator : (1) standard (2) a basis for comparison a reference point against which other things can be evaluated

savings instruments text annotation indicator : vehicles for money that has been set aside for the future. Usually earn interest and are low risk.

certificate of deposit text annotation indicator : a time deposit, which is insured, with a specific, fixed-term, and, usually, a fixed interest rate

money market accounts text annotation indicator : A deposit account that may have transaction and balance restrictions but typically offers a competitive interest rate

interest-bearing checking account text annotation indicator : A demand deposit account that earns interest on the average daily minimum balance

savings bonds text annotation indicator : nontransferable treasury securities. Although they cannot be traded on the secondary market, they can be cashed before their maturity date

corporate bonds text annotation indicator : Debt obligations issued by corporations as an alternative to offering equity ownership by issuing stock

government securities text annotation indicator : debt owed by any level of government

municipal bonds text annotation indicator : Interest-bearing debt issued by state or local governments to finance operating or capital costs

treasury bonds text annotation indicator : interest-bearing obligations issued by the US Treasury with maturities that range from ten to thirty years from the date of issue

stock text annotation indicator : capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity)

mutual funds text annotation indicator : investment company that pools the money of many individual investors and uses it to buy a diversified portfolio of securities.

equity funds text annotation indicator : a fund that invests in equities more commonly known as stocks. Stock funds are contrasted with bond funds and money funds

treasury bills text annotation indicator : Short-term debt securities issued most commonly by the federal government

foreign exchange text annotation indicator : one currency is exchanged for another, enables international transactions to take place

portfolio diversification text annotation indicator : a risk management technique that mixes a wide variety of investments within a portfolio. It is the spreading out of investments to reduce risks.

index fund text annotation indicator : A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance

risk text annotation indicator : exposure to a chance of loss or damage

return text annotation indicator : the income or profit arising from such transactions as the sale of land or other property

diversification text annotation indicator : a risk management technique, related to hedging, that mixes a wide variety of investments within a portfolio

opportunity cost text annotation indicator : The concept that nothing is free.  One choice always means giving up another choice.

investment strategy text annotation indicator : is a set of rules, behaviors, or procedures, designed to guide an investor's selection of an investment portfolio

investment policy statement text annotation indicator : An investment policy statement is a document that presents the general investment goals of an investor and the strategies to be used to achieve those goals.

large-cap stocks text annotation indicator : Large-cap stocks refer to companies with a market capitalization value of more than $10 billion.

market capitalization text annotation indicator : Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share.

mid-cap stocks text annotation indicator : Mid-cap stocks are stocks of a company with a market capitalization between $2 and $10 billion.

small-cap stocks text annotation indicator : Small-cap stocks are stocks of a company with a market capitalization of less than $2 billion.

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